Offshore gas could provide new supply for aging Australia LNG plant
(Australian Business Review; Aug. 30) - The one thing that the Woodside Petroleum-led Browse liquefied natural gas project has never had much of is unity among the project partners. But that may quietly be changing. Sources tell the Business Review that various joint-venture partners in Browse are open to new development options for the project, and that the pipeline option floated by Woodside last week is increasingly being seen by all the partners as the most sensible plan as it stands today.
Woodside CEO Peter Coleman said Aug. 26 that the option of connecting the Browse field to the aging North West Shelf LNG plant via a 600-mile subsea pipeline is back on the table. Each passing day that Browse goes undeveloped is a day closer to when the gas supply into the North West Shelf plant starts to drop away, opening up the prospect of surplus capacity at the five-train plant that started up in 1989. The supply gap is likely to occur in the early 2020s, which could dovetail nicely with a pipeline from Browse.
The new-found partner unity comes as something of a surprise given the recent history at Browse, which was discovered more than 40 years ago but has since been subject to a procession of unsuccessful development plans for an onshore LNG plant or a floating production facility at sea. The Browse offshore field holds about 16 trillion cubic feet of gas and almost half-a-billion barrels of condensate. Woodside, Shell, BP and Japan’s Mitsui and Mitsubishi all have stakes in both Browse and the North West Shelf.
Chevron signs small-volume, 10-year LNG deal to supply China
(Reuters; Aug. 30) - Chevron's liquefied natural gas supply deal with China's ENN LNG Trading Co. may boost the formation of a spot market for the fuel in Asia. Chevron signed a 10-year term deal with ENN to supply up to 650,000 metric tons per year of LNG with first delivery expected in 2018 or the first half of 2019, Chevron said in a statement Aug. 29. ENN is a subsidiary of ENN Energy Holding, which is one of China's largest gas distribution companies and operates in 150 Chinese cities.
ENN is constructing an LNG import terminal in the northeastern city of Zhoushan that is planned to start up by 2018. Chevron expects to supply ENN from its existing LNG assets, "including the company’s Australian LNG interests at Gorgon, Wheatstone and the North West Shelf," the statement said. Companies such as Chevron with flexibility to match their supply with customers around the world are growing in dominance. The contract with ENN covers about 85 million cubic feet of natural gas a day as LNG.
By using a number of supply options rather than one plant to supply ENN, the deal may help the formation of a spot market for LNG. This would help to replace the dominant sales model of multi-year contracts from one supply site to a buyer, said Sophie Corbeau, a researcher at the King Abdullah Petroleum Studies and Research Center.
Australian state plans permanent ban on unconventional drilling
(Reuters; Aug. 30) - The state of Victoria, Australia, plans to ban shale and coal-seam gas fracking in what would be the country’s first permanent ban on unconventional gas drilling, citing the concerns of farmers and potential health and environmental risks. However, the government left the door open to allowing onshore conventional gas [non-fracking] drilling after 2020. The decision was made despite the fact that most of eastern Australia's gas supply is produced from coal-seam gas.
The decision comes as a blow to manufacturers that have been clamoring for more gas to help keep prices down. But farmers are worried that groundwater could be depleted or contaminated by onshore drilling. "Our farmers produce some of the world's cleanest and freshest food. We won't put that at risk with fracking," state Labor Premier Daniel Andrews said Aug. 30. "Victorians have made it clear that they don't support fracking and that the health and environmental risks involved outweigh any potential benefits.”
Gas supply has become an issue following the opening of three liquefied natural gas export plants in the state of Queensland, which together are set to triple gas demand in eastern Australia by 2018 from 2014. Andrews said Victoria, which gets most of its gas from offshore fields, would extend a moratorium on onshore conventional gas drilling while it evaluates the risks and benefits of allowing it. The state has banned all fracking since 2012.
Analyst questions financial health of Australia LNG operator
(The Guardian; Aug. 29) - Santos, one of the companies driving Queensland Australia’s liquefied natural gas export boom, is relying on price projections so optimistic that they inflate the value of the company’s assets by billions of dollars, according to a leading analyst. This month Santos announced a US$1.5 billion write-down of the value of its new Gladstone gas export project. The value of the project dropped because the price that Santos gets for the exported gas is tied to the price of crude oil, which has fallen.
But according to an analysis by the pro-renewables financial activist group Market Forces, that write-down relied on an optimistic prediction for oil prices, with Santos’ projections much higher than those of competitors and brokers such as Deutsche Bank and Goldman Sachs, as well as the World Bank. According to Santos’ own explanation of how its assets are tied to oil prices, if it had used Goldman Sachs’ oil prices rather than its own optimistic ones, the value of its assets would be $3.5 billion less in 2020.
Santos’ write-down has led some analysts to speculate that parts of the new LNG facility would be mothballed within a year or two. “It just seems fanciful,” said Daniel Gocher from Market Forces, who prepared the analysis. “They’re a good $5 to $15 above the median forecast price per barrel,” Gocher said, adding that Santos had more debt than similar companies in the market. Santos declined Guardian Australia’s request to comment. Santos has the lowest investment-grade credit rating of BBB-.
Indian LNG importer wants to increase spot-market buys
(Bloomberg; Aug. 28) - Indian Oil Corp., the nation’s biggest refiner, is boosting its liquefied natural gas business. It is increasing its LNG purchases to take advantage of a price plunge amid a worldwide supply glut. The state-run company plans to buy two LNG cargoes per month in the spot market for six months starting October, according to Debasis Sen, director of planning and business development. That compares with nine spot cargoes for the previous year, when it started importing the commodity directly.
India is among the buyers seeking more cargoes as LNG spot prices have fallen about 60 percent since October 2014. While demand-growth prospects are limited in more mature markets like Japan and South Korea, consumption in India, China and emerging Asian nations will increase, the U.S. Energy Information Administration forecasts. India’s consumption may rise 11 percent a year over the next decade, U.K.-based BMI Research predicts. “Low prices have made LNG more affordable,” Sen said Aug. 25.
“We are witnessing strong demand from customers such as fertilizer, power plants and glass industries,” Sen said. Indian Oil sold 1.93 million metric tons of LNG during the year through March 31, up 6.9 percent from a year ago. It holds rights to market 30 percent of the gas imported by Petronet LNG, the country’s top buyer, and also is seeking to increase its own direct buys in spot deals. Prime Minister Narendra Modi’s administration wants more use of the cleaner fuel in the country’s energy mix to curtail carbon emissions. India has more than doubled its imports in the past seven years.
Oil and gas mega-projects present their own unique difficulties
(Bloomberg column; Aug. 29) - Big Oil just doesn't seem to be as enamored with the 'big' thing as it once was. This isn’t just about mega-billion LNG projects. The major oil companies have been cutting capital expenditure budgets and canceling or delaying major new projects across the board. Deepwater projects, which are typically big-ticket, complex developments, have been among the hardest hit, according to Wood Mackenzie, a global energy consultancy.
Money's tight, obviously, and shareholders want dividends. Another issue, though, may simply be one of scale: Is big really always better? The answer appears no. Before the price crash, Big Oil's annual spending went up by a factor of three compared to the early 2000s, yet its production went down. Generally, you'd expect the opposite: Deploy more capital, boost supply. The reasons for this are debatable, but usually involve: The best fields have already been found; governments restrict access to resources; and higher costs for labor and equipment as everyone tries to grow at the same time.
The other factor could be sheer complexity. In a presentation in May, Chevron noted just how few oil and gas projects get done on time, on budget and meet expectations. Harry Benham, an oil industry veteran who now runs his own consulting firm, said the bespoke approach required for each complex mega-project makes it hard to apply lessons learned in earlier projects, hard to gain efficiencies. Mega-projects are highly complex one-offs, and demand experienced teams to manage their unique difficulties.
Shell exec believes LNG will continue with regional pricing
(Bloomberg; Aug. 30) - Natural gas is rapidly becoming one of the most traded global commodities, but that doesn’t mean it will have a global price, according to Shell. While the fuel can be transported anywhere on LNG carriers, it will probably remain regionally priced for the time being, with some contracts continuing to track oil, said Shell senior vice president for global gas Roger Bounds. Prices will depend on location, regulation and infrastructure, as some countries replace coal in power generation to cut emissions.
“I shouldn’t say it’s not possible, but what would it take for such a [global] price to be possible?” Bounds said in an interview in Norway. “We have some way to go.” For a global gas price to emerge, pipelines would need to shed some interstate regulations like in the U.S., trade data would need to be more transparent and widely available, and buyers and sellers would need more confidence that their contracts will be respected, he said. Europe is partly on that path with some hub pricing, Bounds said.
Conventional contracts that link the price of gas to the price of oil will remain for a while, he said, partly because the two will become increasingly interchangeable as energy sources. Bounds expects global LNG consumption to climb 5 percent to 7 percent a year. A trend of declining usage in Europe may also reverse due to higher demand, with supply coming from U.S. exports, Russia and North Africa.
Gazprom starts round of natural gas auctions for European buyers
(Bloomberg; Aug. 30) - Russia’s Gazprom will start a round of natural gas auctions for utilities and traders in Europe on Aug. 31, a further sign the world’s biggest exporter of the fuel is becoming more market orientated. The sales, which last until Sept. 2, will be the company’s second set of auctions for northwest Europe, adding another tool to its decades-long practice of selling gas under long-term contracts with limited flexibility.
European buyers have benefited from a global glut of gas that has helped knock down prices in the U.K. by 28 percent over the past year amid stagnating demand. Gazprom supplies about 30 percent of Europe’s gas, with Germany its biggest buyer, under contracts that run for decades. Typically, clients are bound by a take-or-pay clause that forces them to purchase minimal volumes or pay for the gas regardless of demand. Most contracts have a price formula linked to oil with a time lag of six to nine months.
Since the 2008 economic crisis, buyers have sought to renegotiate Gazprom contracts to include a link to European gas hub prices, the benchmarks used to sell the fuel within the region. Gazprom CEO Alexey Miller has said the auctions are a response to a changing European gas market. “Gazprom needs to grow its market share in Europe, and the only way they can do that is to increase the flexibility of commercial terms and embrace market pricing,” said Richard Chatterton at Bloomberg New Energy Finance.
Canadian minister agreed LNG projects would need foreign workers
(The Canadian Press; Aug. 29) - The federal labor minister was told earlier this year to give a positive signal to liquefied natural gas project proponents about the use of temporary foreign workers during construction, but only if Canadians were considered first for jobs. Labor Minister MaryAnn Mihychuk’s staff told her in February that it was inevitable that companies would need temporary foreign workers to proceed with any of the LNG plants proposed for the British Columbia coast.
In a Feb. 1 briefing, officials wrote that the federal government could speed up its processing of applications for temporary foreign workers but could not waive requirements for LNG projects. The briefing note, prepared ahead of Mihychuk’s meeting with David Keane, president of the BC LNG Alliance, recommends “signal support” for temporary foreign workers “on the condition that Canadians are considered first for available jobs … and only used as a measure of last resort.” The Canadian Press obtained a copy of the briefing note under the Access to Information Act.
The briefing note said unions are unlikely to speak out publicly about the use of temporary foreign workers because they know the majority of jobs will go to union members and that Canadians will be first in line for jobs.
Anti-drilling initiative in Colorado fails to gather enough signatures
(Bloomberg; Aug. 29) - Oil and gas explorers from Anadarko Petroleum to Synergy Resources have escaped a vote in Colorado that would have limited drilling and threatened to halt about $10 billion worth of oil and gas production a year. A proposal known as Initiative 78, which would have prohibited drilling within 2,500 feet of homes, fell about 21,000 valid signatures short of the 98,500 needed to qualify for a ballot vote, based on a projection in a statement from Colorado Secretary of State Wayne Williams.
A measure allowing local governments to ban fracking also failed to attract enough valid signatures. The measures had threatened to wipe out oil and gas drilling in Colorado, which produced 327,000 barrels of oil a day in 2015, up from 64,000 barrels a day in 2005, and almost 4.6 billion cubic feet of natural gas a day in 2015, the sixth-largest gas producer among states. Initiative 78 alone could have barred drilling across 90 percent of the state, where explorers extracted about $10 billion worth of oil and gas last year.
Energy explorers would have left Colorado “in droves if voters ever approved ballot initiative 78,” Bloomberg Intelligence analysts Rob Barnett, Bernard Chen and Vincent Piazza said in the analysis Aug. 29. Food & Water Watch, one of the groups that helped gather signatures, called it an uphill battle. "We were outspent 35-to-1 by oil industry proponents and faced an unprecedented effort to keep the measures off the ballot," said Laurie Petrie, the group’s Rocky Mountain director.
Natural gas prices up in Northeast U.S. as inventory surplus shrinks
(Bloomberg; Aug. 26) - The historical tie between U.S. natural gas and power prices is unraveling amid a glut of electricity generation. The price of 2017 gas deliveries to the Northeast has jumped 26 percent since the beginning of March as an inventory surplus shrinks, according to a Bloomberg analysis. Electricity prices in the East, however, have gained only about 2 percent in the face of multiple supply options.
Blame it on an oversupplied electricity market. In the 13-state eastern grid managed by PJM Interconnection, cheap coal is vying with gas-fired generation. Meanwhile, summer heat has pushed power plants’ gas demand to a record as air conditioners hum, eroding the natural gas supply glut and helping to push up prices for the fuel. “There’s more than enough power generation,” said Anthony Crowdell, an analyst for Jefferies in New York. “Times are tough.”
The disconnect comes even as natural gas overtakes coal as the biggest source of U.S. power generation this year, based on U.S. Energy Information Administration estimates. Gas accounts for more than a third of the country’s electricity production. Low 2017 electricity prices could mean dark days ahead for independent power producers.
China will need to import more oil as domestic production in decline
(Wall Street Journal; Aug 26) - China’s struggling oil sector has entered a challenging new phase — the long-term decline of its domestic production. Oil production in China likely peaked last year at about 4.3 million barrels a day, according to new data and interviews with industry executives. The development has significant implications globally, including the potential for higher crude prices over time as China steps up imports to meet rising demand at home.
“The turning point that we’ve been searching for, for years, is happening now,” said Kang Wu, vice chairman for Asia at energy consultancy FGE. As an oil producer, he said, “China is entering long-term stagnation and decline.” For years, the world’s second-largest economy eked out gains from its aging oil fields as demand surged. But new discoveries haven't been enough to keep production growing, and the crash in commodities prices led the state-owned oil giants to sideline less-productive wells.
All this puts pressure on China’s oil giants to step out on the global stage. At the same time, China will be forced to boost imports. As domestic production falls, additional barrels that China needs to fuel the new cars hitting its streets will come from overseas. That marks a major shift for a country that not long ago saw energy independence as a key part of national security. It also deepens China’s exposure to global hot spots. Among its biggest suppliers today: Saudi Arabia, Russia, Angola and Iraq.
Protestors force cancellation of TransCanada oil pipeline hearings
(Montreal Gazette; Aug. 29) - After a dozen protestors commandeered the room Aug. 29, the National Energy Board cancelled the first day and then later the entire week of hearings into TransCanada’s Energy East oil sands pipeline, scheduled to be held in Montreal. Before the hearings could even get underway, a protestor rushed the head table and was held back by security guards as he tried to lunge over it. After wrangling himself free, he was joined by a dozen other people yelling anti-TransCanada chants.
Protestors said they wouldn’t leave until the hearings were cancelled. After 30 minutes, police were called in to force them out. Most left peacefully. “In light of this morning’s events, we have no choice but to cancel today’s hearings,” NEB Director Jean-Denis Charlebois said. Sarah Kiley, an NEB spokeswoman, said the agency is considering other ways to gather comments from people scheduled to speak this week in Montreal. Sessions already have been held in New Brunswick and others are pending.
Montreal Mayor Denis Coderre had announced earlier this year that he and 81 other mayors from the Montreal Metropolitan Community oppose the proposed pipeline, in part because they feel the environmental risks outweigh the economic benefits the pipeline would bring to Quebec. Those who support the pipeline project — which would stretch 2,800 miles, cost $15.7 billion and carry crude oil from Alberta to refineries in Eastern Canada — were also present at the NEB hearing that was canceled.
Oil execs say price volatility ‘here to stay,’ at least through 2017
(Bloomberg; Aug, 29) - Crude markets will continue to be plagued by volatility in the short and medium term after suffering the biggest downturn in a generation over the past two years, according to oil company executives gathering for one of the industry’s biggest conferences in Norway. “The volatility is here to stay,” ConocoPhillips CEO Ryan Lance said on the sidelines of the ONS Conference on Aug. 29. Market rebalancing, he said, “will extend into 2017 … the inventory levels are still quite high.”
“Basically, volatility is the word,” said Martin Bachmann, head of exploration and production in Europe and the Middle East at German oil and gas producer Wintershall. “There will be a rebalancing. Over what timeframe is the big question,” Bachmann said. It may take time for markets to strengthen and there will be great uncertainty in the meantime, Statoil CEO Eldar Saetre said in an interview at the ONS Conference (Offshore Northern Seas) in Stavanger.
“The rebalancing in the oil market is already happening,” said Norway’s Petroleum and Energy Minister Tord Lien. Still, “parts of the supplier industry will continue to have demanding months ahead.” That doesn’t mean a turnaround is imminent, said Scott Sheffield, CEO of Texas-based Pioneer Natural Resources. “The downturn’s behind us, but the question is how long do we stay in a $45 to $50 oil-price scenario? I think 2017 could be another tough year. I’m a firm believer that in 2018 it could turn around.”
Investment cutbacks raise fears of ability to meet future oil demand
(Bloomberg; Aug. 29) - Explorers in 2015 discovered only about one-tenth as much oil as they have annually on average since 1960. This year, they’ll probably find even less, spurring new fears about their ability to meet future demand. With prices down by more than half since the price collapse two years ago, drillers have cut deeply into exploration budgets. The result: Just 2.7 billion barrels of new supply was discovered in 2015, the smallest amount since 1947, according to consultancy Wood Mackenzie. This year, drillers had found just 736 million barrels of conventional crude as of the end of July.
That’s a concern for the industry as the U.S. Energy Information Administration estimates global oil demand will grow from 94.8 million barrels a day this year to 105.3 million barrels in 2026. While U.S. shale could potentially make up the difference, prices locked in below $50 a barrel have undercut any substantial growth there. Discoveries from conventional drilling, meanwhile, are “at rock bottom,” said Nils-Henrik Bjurstroem, a senior project manager at Oslo-based consultants Rystad Energy. “There will definitely be a strong impact on oil and gas supply, and especially oil.”
Years of under-investment will be felt as soon as 2025, Bjurstroem said. Producers will replace little more than one in 20 of the barrels consumed this year, he said. Global spending on exploration, from seismic studies to drilling, has been cut to $40 billion this year from about $100 billion in 2014, said Andrew Latham, Wood Mackenzie’s vice president for global exploration. Kristin Faeroevik, managing director for the Norwegian unit of Lundin Petroleum, a driller that’s active in Norway, said it will take "five to eight years probably before we see the impact" on production from the current cutbacks.